Revenue of $608.3 million, an increase of 2.2% compared to the first quarter of 2019, and an increase of 17.0% from the second quarter of 2018.

GAAP gross margin of 64.1%, compared to GAAP gross margin of 63.9% in the first quarter of 2019 and 64.2% in the second quarter of 2018.

Non-GAAP gross margin of 64.7%, compared to non-GAAP gross margin of 64.5% in the first quarter of 2019 and 64.5% in the second quarter of 2018.

GAAP net income of $189.3 million, or $2.33 per diluted share, compared to GAAP net loss of $155.3 million, or $2.08 per diluted share in the second quarter of 2018.

Non-GAAP net income of $198.6 million, or $2.44 per diluted share, compared to non-GAAP net income of $155.7 million, or $1.93 per diluted share in the second quarter of 2018.

“In Q2 2019, Arista raised the ante with innovative products in both 400G and Cognitive Campus. Our leadership in cloud area networking is now widely recognized by industry analysts, partners and customers,” stated Jayshree Ullal, Arista President and CEO.

Commenting on the company’s financial results, Ita Brennan, Arista’s CFO, said, “The business continued to demonstrate solid earnings and cash flow generation for the quarter.”

Second Quarter Company Highlights

Arista Delivers Universal 400G Platforms for Cloud Network Transformation – Arista Networks introduced the new 7800R family for demanding 400G cloud networks and the next generation of the Arista 7500R, 7280R Series. The new platforms support 100G and 400G Ethernet with compelling throughput, density and price-performance and offer new telemetry and intelligence.

Arista Enables Cloud Area Networking on Microsoft Azure – Announced the next-generation hybrid cloud architecture for the enterprise. This new offering leverages the Microsoft Azure global network, integrates Arista EOS® with Azure and Azure Stack, focusing on the delivery of a seamless hybrid computing experience for organizations of any size.

Guidance for non-GAAP financial measures excludes stock-based compensation expense, amortization of acquisition-related intangible assets, and other non-recurring items. A reconciliation of non-GAAP guidance measures to corresponding GAAP measures is not available on a forward-looking basis (see further explanation below).

Prepared Materials and Conference Call Information

Arista executives will discuss the second quarter 2019 financial results on a conference call at 1:30 p.m. Pacific time today. To listen to the call via telephone, dial (833) 287-7905 in the United States or (647) 689-4469 from outside the US. The Conference ID is 5568407.

The financial results conference call will also be available via live webcast on our investor relations website at https://investors.arista.com/. Shortly after the conclusion of the conference call, a replay of the audio webcast will be available on Arista’s investor relations website.

Forward-Looking Statements

This press release contains “forward-looking statements” regarding our future performance, including statements in the section entitled “Financial Outlook,” such as estimates regarding revenue, non-GAAP gross margin and non-GAAP operating margin for the third quarter of fiscal 2019, and statements regarding the benefits from the introduction of new products and our leadership in cloud area networking. Forward-looking statements are subject to known and unknown risks, uncertainties, assumptions and other factors that could cause actual results, performance or achievements to differ materially from those anticipated in or implied by the forward-looking statements including risks associated with: Arista Networks’ limited operating history; Arista Networks’ rapid growth; Arista Networks’ customer concentration; the evolution and growth of the cloud networking market and the adoption by end customers of Arista Networks’ cloud networking solutions; changes in our customers’ demand for our products and services; requests for more favorable terms and conditions from our large end customers; declines in the sales prices of our products and services; customer order patterns or customer mix; the timing of orders and manufacturing and customer lead times; increased competition in our products and service markets; dependence on the introduction and market acceptance of new product offerings and standards including our 400G products as well as our campus and WiFi products; the benefits and impact of acquisitions; rapid technological and market change; Arista Networks’ dispute with OptumSoft; our revenue growth rate; and general market, political, economic and business conditions. Additional risks and uncertainties that could affect Arista Networks can be found in Arista’s most recent Quarterly Report on Form 10-Q filed with the SEC on May 6, 2019, and other filings that the company makes to the SEC from time to time. You can locate these reports through our website at https://investors.arista.com/ and on the SEC’s website at https://www.sec.gov/. All forward-looking statements in this press release are based on information available to the company as of the date hereof and Arista Networks disclaims any obligation to publicly update or revise any forward-looking statement to reflect events that occur or circumstances that exist after the date on which they were made.

Gartner does not endorse any vendor, product or service depicted in its research publications, and does not advise technology users to select only those vendors with the highest ratings or other designation. Gartner research publications consist of the opinions of Gartner’s research organization and should not be construed as statements of fact. Gartner disclaims all warranties, expressed or implied, with respect to this research, including any warranties of merchantability or fitness for a particular purpose.

Non-GAAP Financial Measures

This press release and accompanying tables contain certain non-GAAP financial measures including non-GAAP gross profit, non-GAAP gross margin, non-GAAP income from operations, non-GAAP operating margins, non-GAAP net income and non-GAAP diluted net income per share. These non-GAAP financial measures exclude stock-based compensation expense, litigation-related expenses, amortization of acquisition-related intangible assets, other non-recurring charges or benefits, and the income tax effect of these non-GAAP exclusions. In addition, non-GAAP financial measures exclude net tax benefits associated with stock-based awards, which include excess tax benefits, and other discrete indirect effects of such awards. The company uses these non-GAAP financial measures internally in analyzing its financial results and believes that these non-GAAP financial measures are useful to investors as an additional tool to evaluate ongoing operating results and trends. In addition, these measures are the primary indicators management uses as a basis for its planning and forecasting for future periods.

Non-GAAP financial measures are not meant to be considered in isolation or as a substitute for the comparable GAAP financial measures. Non-GAAP financial measures are subject to limitations, and should be read only in conjunction with the company’s consolidated financial statements prepared in accordance with GAAP. Non-GAAP financial measures do not have any standardized meaning and are therefore unlikely to be comparable to similarly titled measures presented by other companies. A description of these non-GAAP financial measures and a reconciliation of the company’s non-GAAP financial measures to their most directly comparable GAAP measures has been provided in the financial statement tables included in this press release, and investors are encouraged to review the reconciliation.

The company’s guidance for non-GAAP financial measures excludes stock-based compensation expense, amortization of acquisition-related intangible assets, and other non-recurring items. The company does not provide guidance on GAAP gross margin or GAAP operating margin or the various reconciling items between GAAP gross margin and GAAP operating margin and non-GAAP gross margin and non-GAAP operating margin. A reconciliation of the non-GAAP financial measures guidance to the corresponding GAAP measures on a forward-looking basis is not available because stock-based compensation expense is impacted by the company’s future hiring and retention needs and the future fair market value of the company’s common stock, all of which are difficult to predict and subject to constant change. The actual amount of stock-based compensation expense will have a significant impact on the company’s GAAP gross margin and GAAP operating margin.

ARISTA, EOS, CloudVision, Cognitive WiFi and AlgoMatch are among the registered and unregistered trademarks of Arista Networks, Inc. in jurisdictions around the world. Other company names or product names may be trademarks of their respective owners.

Weighted-average shares used in computing net income (loss) per share attributable to common stockholders:

Basic

76,552

74,503

76,238

74,250

Diluted

81,335

74,503

81,271

74,250

ARISTA NETWORKS, INC.

Reconciliation of Selected GAAP to Non-GAAP Financial Measures

(Unaudited, in thousands, except percentages and per share amounts)

Three Months Ended June 30,

Six Months Ended June 30,

2019

2018

2019

2018

GAAP gross profit

$

390,191

$

333,883

$

770,761

$

636,802

GAAP gross margin

64.1

%

64.2

%

64.0

%

64.2

%

Stock-based compensation expense

1,028

1,236

2,126

2,438

Intangible asset amortization

2,626

—

5,251

—

Non-GAAP gross profit

$

393,845

$

335,119

$

778,138

$

639,240

Non-GAAP gross margin

64.7

%

64.5

%

64.6

%

64.4

%

GAAP income (loss) from operations

$

206,837

$

(239,803

)

$

401,179

$

(101,065

)

Stock-based compensation expense

24,297

22,478

48,588

43,329

Litigation expense

514

3,569

1,962

10,654

Legal settlement (1)

—

405,000

—

405,000

Intangible asset amortization

3,499

—

6,998

—

Non-GAAP income from operations

$

235,147

$

191,244

$

458,727

$

357,918

Non-GAAP operating margin

38.7

%

36.8

%

38.1

%

36.1

%

GAAP net income (loss)

$

189,251

$

(155,269

)

$

390,280

$

(10,731

)

Stock-based compensation expense

24,297

22,478

48,588

43,329

Litigation expense

514

3,569

1,962

10,654

Legal settlement (1)

—

405,000

—

405,000

Intangible asset amortization

3,499

—

6,998

—

Altera stock-based tax charge (2)

9,781

—

9,781

—

(Gain) loss on investment in privately-held companies

—

9,100

(1,150

)

9,100

Tax benefit on stock-based awards

(23,455

)

(25,472

)

(60,509

)

(58,318

)

Income tax effect on non-GAAP exclusions

(5,324

)

(103,686

)

(9,657

)

(109,191

)

Non-GAAP net income

$

198,563

$

155,720

$

386,293

$

289,843

GAAP diluted net income (loss) per share attributable to common stockholders

$

2.33

$

(2.08

)

$

4.80

$

(0.14

)

Non-GAAP adjustments to net income (loss)

0.11

4.01

(0.05

)

3.73

Non-GAAP diluted net income per share

$

2.44

$

1.93

$

4.75

$

3.59

Weighted-average shares used in computing GAAP diluted net income (loss) per share attributable to common stockholders

81,335

74,503

81,271

74,250

Weighted-average shares used in computing Non-GAAP diluted net income per share attributable to common stockholders

81,335

80,826

81,271

80,774

Summary of Stock-Based Compensation Expense:

Cost of revenue

$

1,028

$

1,236

$

2,126

$

2,438

Research and development

12,568

11,745

25,699

22,690

Sales and marketing

7,097

6,274

13,631

12,234

General and administrative

3,604

3,223

7,132

5,967

Total

$

24,297

$

22,478

$

48,588

$

43,329

________________

(1) Represents one-time charges associated with the settlement of our lawsuit with Cisco on August 6, 2018.

(2) Represents a discrete income tax expense related to stock based compensation as a result of an opinion on Altera Corporation and Subsidiaries vs. Commissioner on Internal Revenue issued by the Court of Appeals for the Ninth Circuit on June 7, 2019.

ARISTA NETWORKS, INC.

Condensed Consolidated Balance Sheets

(Unaudited, in thousands)

June 30, 2019

December 31, 2018

ASSETS

CURRENT ASSETS:

Cash and cash equivalents

$

944,414

$

649,950

Marketable securities

1,313,389

1,306,197

Accounts receivable

343,080

331,777

Inventories

314,177

264,557

Prepaid expenses and other current assets

113,458

162,321

Total current assets

3,028,518

2,714,802

Property and equipment, net

41,023

75,355

Acquisition-related intangible assets, net

51,612

58,610

Goodwill

53,684

53,684

Investments

31,486

30,336

Operating lease right-of-use assets

94,203

—

Deferred tax assets

113,660

126,492

Other assets

27,106

22,704

TOTAL ASSETS

$

3,441,292

$

3,081,983

LIABILITIES AND STOCKHOLDERS’ EQUITY

CURRENT LIABILITIES:

Accounts payable

$

86,134

$

93,757

Accrued liabilities

113,898

123,254

Deferred revenue

272,366

358,586

Other current liabilities

52,622

30,907

Total current liabilities

525,020

606,504

Income taxes payable

45,804

36,167

Operating lease liabilities, non-current

89,705

—

Finance lease liabilities, non-current

—

35,431

Deferred revenue, non-current

229,852

228,641

Other long-term liabilities

25,351

31,851

TOTAL LIABILITIES

915,732

938,594

STOCKHOLDERS’ EQUITY:

Common stock

8

8

Additional paid-in capital

1,038,740

956,572

Retained earnings (1)

1,484,777

1,190,803

Accumulated other comprehensive income (loss)

2,035

(3,994

)

TOTAL STOCKHOLDERS’ EQUITY

2,525,560

2,143,389

TOTAL LIABILITIES AND STOCKHOLDERS’ EQUITY

$

3,441,292

$

3,081,983

____________________________

(1) We adopted new lease accounting guidance under ASC 842, which resulted in a cumulative-effect adjustment of $3.7 million to retained earnings as of January 1, 2019.

ARISTA NETWORKS, INC.

Condensed Consolidated Statements of Cash Flows

(Unaudited, in thousands)

Six Months Ended June 30,

2019

2018

CASH FLOWS FROM OPERATING ACTIVITIES:

Net income (loss)

$

390,280

$

(10,731

)

Adjustments to reconcile net income (loss) to net cash provided by operating activities: